Taking big expansionary policy steps to cure economic malaise

By J. Bradford DeLong

There are many subtleties in how governments and central banks should attempt to accomplish these steps. And, indeed, the North Atlantic region’s governments and central banks have tried to some degree. However, it is clear that they have not tried enough: The “stop” signal of unanchored inflation expectations, accelerating price growth and spiking long-term interest rates — all of which tell us that we have reached the structural and expectational limits of expansionary policy — has not yet been flashed.

So we remain far short of full employment for the third reason. The issue is not that governments and central banks cannot restore employment, or do not know how; it is that governments and central banks will not take expansionary policy steps on a large enough scale to restore full employment rapidly.

And here it is worth reflecting on the 1930s, and on how historical events recur, appearing first as tragedy and then, pace Karl Marx, as yet another tragedy. Keynes begged the policymakers of his time to ignore the “austere and puritanical souls” who argue for “what they politely call a ‘prolonged liquidation’ to put us right,” and professed that he could “not understand how universal bankruptcy can do any good or bring us nearer to prosperity.”

Today’s policymakers, so eager to draw a bold line under expansionary measures, should pause and consider the same question.

J. Bradford DeLong, a former deputy assistant secretary of the US Treasury, is a professor of economics at the University of California at Berkeley and a research associate at the National Bureau for Economic Research.